Yen, Rates, Bank Stocks Raising Red Flags Again

How have I been able to stay one step ahead of the markets since last summer?

Which indicators keep telling me again and again that we’re in an entirely different environment than we were from 2009 through 2015?

Why do I keep saying that market risk and volatility should rise further, and that central banks are losing control?

Start with the Japanese yen. I flagged this key “risk off” indicator multiple times in a wide range of trading services and here in Money and Markets.

Today, the yen went bonkers. It took out the recent spike highs from February and March, rallying to a 17-month high against the greenback before taking a breather.

This happened despite even more rumblings and leaks from the Bank of Japan today that it might try further easing to stem the yen rally. Those efforts would follow by mere weeks a round of previous steps that utterly failed to cap the yen’s momentum — a growing sign of central bank impotence overseas.

Red flags over the global economy.

Next up is the interest-rate market. It isn’t cooperating with the stock market, or central bankers, at all. Bond prices have been rising nonstop since mid-March, while the yield curve is pancaking flatter again.

Earlier today, the yield on the 10-year government note in Germany gave up all of its recent gains — then took out the low from February’s market panic. At just 9 basis points, or 0.09%, it’s within a whisker of the all-time low set back in April 2015.

These aren’t the kinds of market moves that “should” happen if investors actually believed the latest central bank hocus-pocus would result in stronger growth, rising inflation, and a surge to new highs in risk-taking. So I’ll chalk it up as another repudiation of the reflation efforts of central banks worldwide.[Read More – The Consequences of Reckless Lending – Mike Larson]

“Speaking of Europe, have you seen the trading in European bank stocks? They’re all heading back into the abyss.”

Speaking of Europe, have you seen the trading in European bank stocks? The same ones that led the last leg down in global markets amid fears of surging credit risk?

They’re all heading back into the abyss, with German mega-giant Deutsche Bank (DB) now just a buck and change away from its February lows. You’ll see similar lousy action in Banco Santander (SAN), UBS Group (UBS), or a host of other European names.

Heck, shares of global giant HSBC Holdings (HSBC) actually took out its February level this morning. With the exception of a brief period during the 2008-2009 credit crisis, HSBC hasn’t been this cheap since the last century (1996, to be precise).

I can’t tell you exactly how every 100-point swing in the Dow will play out. But I can tell you that these (and other) indicators have consistently warned since last summer that things aren’t as rosy behind the scenes as they may appear at first glance. They’ve continued to point to a major turn in the credit cycle, and to the lack of staying power in multiple stock market rallies over the past several quarters.

So keep an eye on all of the indicators, and my commentaries here in Money and Markets. We’re living in volatile times, and I’m going to keep doing my best to help you sail through them as smoothly as possible.

Now, let me hear what you have to say. Are the latest moves in the yen, interest rates, or European bank stocks important to you? Or are you paying attention to other indicators? What do you think are some of the primary driving forces behind stock market moves now, if not those?

Our Readers Speak

Is the auto industry in trouble? What will that mean for banks and independent lenders stuffed to the brim with auto paper? Several of you jumped into that debate overnight.

Reader Dirk said: “Yes, car manufacturers and dealers will have a bad time. But the ones which will absolutely get hammered are the financial companies who provide loans to subprime borrowers who will default. Any suggestions for shorting (or put options)?

Reader Howard added: “Bad loans will force a credit crunch by the banks and rebound throughout the economy. It’s why I have lost confidence in our broader market. When there are no more policy moves left other than to play the hand we are dealt, then it’s time to look for safety.”

Reader Timothy A. shared some on-the-ground intel, saying: “I live in the back yard of the headquarters for General Motors (GM), Ford Motor (F), and Chrysler (FCAU), Auburn Hills, Michigan. I have been noticing for months now, large areas of storage for new cars stacking up. Dealerships are also renting off site locations to park their vehicles.

“I would guess they are not selling as fast as they are taking delivery. I would also guess the housing market is going to be right behind them before long. I hope I am wrong, because I make my living building commercial buildings.”

For his part, Reader Frebon said auto-sector problems will make a struggling economy even worse: “Now that the Fed has admitted they cannot help much in the event of a recession, what is going to create demand? How do you get money into the hands of people who will spend it instead of just buying back stock, increasing dividends, increasing their Tier 1s, and investing overseas and taking jobs with them?

“Our economic policies have eroded the middle class to the point where the rich have everything they need and don’t have to buy anything, and the poor are subsidized by the government. This is a surefire road to financial chaos.”

Lastly, Reader Thomas M. said: “Hope springs eternal, but reality dictates the future. The consumer economy is in trouble. This translates in many ways, all of which are occurring now.”

I really appreciate the insights and comments. I believe the auto woes will likely have a significant impact on the broader economy and stock market. In fact, I have recommended select investments designed to help profit from auto-sector problems in my Safe Money Report service. It wouldn’t be fair to my paying subscribers to share those recommendations here, but feel free to click the link if you’re interested.

Any other comments I haven’t covered yet? Then be sure to share them below.

Other Developments of the Day

The Treasury Department just lowered the boom on companies seeking to move their domiciles overseas just to shortchange Uncle Sam. Specifically, it proposed new rules related to non-U.S. shareholder ownership thresholds and to so-called “earnings stripping” designed to increase deductions on interest payments, among others.

The move destroyed shares of pharmaceutical giant Allergan (AGN), sending them down 15% on the day. That’s because AGN was planning a massive $160 billion merger with Pfizer (PFE), one that was heavily dependent on the old tax rules for its success.

Walt Disney Co.’s (DIS) CEO succession plan is going to need a rewrite. That’s because heir apparent Tom Staggs just announced he will leave the company. Staggs was the entertainment giant’s COO, and he is leaving because the board of directors apparently couldn’t assure him he would be the next executive. Current Disney CEO Bob Iger earlier has indicated he would retire by June 2018.

I’m no basketball fan. But Villanova’s at-the-buzzer victory over North Carolina in the NCAA Championship game was one heck of a finish. The move gave Villanova its first national title since 1985. And for you baseball fans, enjoy the fact the 2016 MLB season is now underway!

What do you think of the Treasury’s new “tax inversion” rules? Will it be yet another huge problem for a drug industry that’s already under fire for unconscionable price hikes and underinvesting in R&D? How about Disney? Would you buy or sell the stock in light of the news on the CEO front? Any thoughts on last night’s basketball shocker … or for that matter, the start of another baseball season? Hit up the discussion section and weigh in with your comments or predictions.

Until next time,

Mike Larson

Recommended Articles by Mike Larson:

Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.

{27 comments }

scottTuesday, April 5, 2016 at 4:56 pm

Not bad. I graduated with a B.S. in Economics from The Wharton Business School and M.B.A. from Northwestern University’s Kellogg Graduate School of Management. I can help you

Robert GohTuesday, April 5, 2016 at 5:04 pm

I will be waiting to hear from you.

Bruce TretheweyTuesday, April 5, 2016 at 5:05 pm

There is a social shift away from the rampant consumerism of the past. Try giving my daughter’s kids presents and you will get a roasting. Obviously there are different groups, this is the first I have seen anti consumerism developing is a reasonably sized section of the market. There will always be the Dollar store affectioniatos but when the 200K households are holding off, they make a bigger difference.

JimTuesday, April 5, 2016 at 5:13 pm

Do you think this is an ethics consideration or financial? Jim

JamesTuesday, April 5, 2016 at 5:34 pm

Auto and home sales the two ends of the stick that effect every thing in between. Not looking good. Just because the oval office says every thing is great and they throw around some smoke and mirrors I think we really now know that is not the truth always and especially now during a election period of time. Any thing for a vote.

badger 10Tuesday, April 5, 2016 at 5:38 pm

I always enjoy Mr. Larsons comments. Our larger national debt is a continuing concern as growth can’t be sustained. The recent strong rally has faltered and indicates the market top is intact. Look for continued weakness to persist as growth and earnings will not be evident to sustain a bull market.

HowardTuesday, April 5, 2016 at 5:41 pm

Mike

The problems faced by retirees trying to survive on interest income added to the declining middle class wealth presents even more challenges for a low interest rate environment. What the leaders are doing to manage the economy isn’t working or fixing the problems. How much more mismanagement and can kicking do we all have to go through before the FED finds a pair and begins to normalise rates.

EdTuesday, April 5, 2016 at 6:27 pm

Fasten your seat belts ” this SUCKER is going down ” and
Pray for America to RETURN to GOD
God bless you all
Salud amigos es hora de una cerveza muy fria !

WillTuesday, April 5, 2016 at 6:49 pm

Buy gold before helicopter money arrives is all I can say; after having a good cold beer and buying some brewery stock first that is.

JimTuesday, April 5, 2016 at 8:40 pm

You’re onto something Will. You know how the Eagle is always telling us the markets soar under Democrats and crash under Republicans? I did some research and he is right, but it’s only half the story. Take The New Deal. The basic appeal FDR made was “vote for me and I will give you money”. Sound familiar? He did just that and the first year of his term featured one of the best market rallies in history. But his policies did absolutely nothing for the economy. Unemployment was higher in 1939 than 1931. What it did do was inspire confidence, encouraging people to spend and invest. This is virtually the same routine Obama and Yellen have given us the last seven years and the market has soared and the underlying economy has struggled. Bottom line: the market isn’t the economy. If the Democrats win this fall you will get your “helicopter money” and we will rally. It’s just putting off the final reckoning, which will probably fall in the lap of some unwitting Republican and history repeats. You are spot on recommending gold as the best defense against this cynical con game. Jim

Chuck BurtonTuesday, April 5, 2016 at 7:56 pm

The Treasury’s new restrictions on tax inversions, show just how much the government bureaucrats and politicians regard “your” money as really being theirs to play with. Contrary to constitutional guarantees, we-the-people own NOTHING in their eyes. It will only get worse before we rebel. We show little sign of having had enough yet. There should be mobs in the streets of Washington, and will be in some future time.

Chuck BurtonTuesday, April 5, 2016 at 8:02 pm

Yes, they are restricting “big business”, but remember, those companies are owned by people, either through individual stock purchases, or via shares in funds.

AaronTuesday, April 5, 2016 at 7:59 pm

If repossession rates go up, it will be a disaster for the auto companies! Many of the vehicles sold in recent years have been leased. At the end of the lease, these vehicles are returned to the selling dealer at residual values set with the guidance of auto finance companies. High repossession rates will result in an excess supply of used cars, a sharp decline in residual values and great financial harm to finance companies and banks!

Declines in used car values will also cause a decline in new car sales. A large portion of new vehicles are sold to customers who trade in their old car for a new one. The reduced trade in values will make new car purchase unaffordable for many people!

Chuck BurtonTuesday, April 5, 2016 at 8:20 pm

And remember, those repos will usually be low mileage, and often in almost new condition, one to three years old. They will be something of a glut on the market, as dealers need to get rid of them before potential buyers realize they may be better values than the new, full price models. Many will be exported to poorer countries in Asia, Africa and S. America, though.

Lifestudent38Wednesday, April 6, 2016 at 3:43 am

No thanks; we already have dealerships with piling inventories here in South Africa! Plus the economic downturn is widespread across the world! Perhaps China can handle it.

HowardTuesday, April 5, 2016 at 9:45 pm

Aaron

Consider also that this is with oil at $30 barrel.

StevenTuesday, April 5, 2016 at 8:28 pm

As part of my Finance Class (B.S. in Bus. Admin.) my assignment was to select three companies to invest in with stock purchases. I chose Target, Oracle and Disney. Target I knew was bread and butter and would continue to attract customers from Wal-Mart due to its friendlier atmosphere. Oracle has been the invisible hand that has been keeping business running and secure. I thought that Disney with its purchase of the Star Wars franchise would revitalize the company as the movie was a decent success. What I forgot about was the third leg of Disney’s stool, the Broadcast and Cable operations. ESPN is not doing well at all and the troubles with KABC and the oversaturation of the FIOS/Cable networks has made TV programming a dime-store commodity. While Target and Oracle were steady performers, Disney was a dog like its character Pluto and just about as far out in space as the planet. I rather think that Disney’s uncertain future that will require major structuring is the reason that Tom Staggs said, “No Thanks,” and walked away. As COO he would know better than anyone in the company just what and where the problems are. At $92.50+/- per share Disney is a definite sell while you can, and buy Oracle and Target as that is where the economy is headed. From where I sit my tea leaves tell me that we are headed for a market contraction. I pray to God that is all it will be and not another falling off the cliff as was eight years ago.

BarryTuesday, April 5, 2016 at 11:01 pm

I love the reading everyone.
Does anyone want to educate me on my thoughts.
If Japan has been in a flat growth economy for the last 20-30 years whilst riding on the back of the global economy. Can anyone tell me how the global economy is going to get by on negative rates etc, with no other planets economy to ride on the back of?
It is going to be interesting just how long the global manipulators can keep sleeping the crap under the rug, before it starts showing up around the edges? Thoughts please.

JimTuesday, April 5, 2016 at 11:56 pm

When you consider the only things the average citizen comprehends are sports and entertainment, heck, this could go on forever. Jim

GordonWednesday, April 6, 2016 at 1:59 am

Yes the Panama Papers were a real gift to the government to put the squeeze on the little guy and to advance their agenda on speeding up the process to a cashless society.

GordonWednesday, April 6, 2016 at 2:04 am

I see Obama last night also taking advantage of the Panama Papers talking about changes in the tax system and blaming Republicans for not moving on the issue. Then some Republican came on the news and blamed OBama saying that the tax rate at 35% in the US was to high thats why companies were leaving. If you take a look at most major corporations they always manipulate tax returns to show a loss so that they can get rebates back from you and I the “little people” who really pay their taxes. If companies want to generate income in the US then they should be obligated to pay taxes there not set up headquarters in Ireland to take advantage of the lower rate there.

Kishin ManghnaniWednesday, April 6, 2016 at 2:45 am

I congratulate you on the courage of your convictions about the markets and the economy
even though these convictions were vastly belied by the strong global rally (rather unexpected both in scope, nature and extent ) that has taken place from 11th Feb. to 3rd
April. This rally almost stripped many off their belief that a recession is in the offing.
I am an avid reader of your newsletters but fully appreciate and endorse your views but is just not happening.

Regards.

Lifestudent38Wednesday, April 6, 2016 at 3:50 am

Before the dotcom bubble; companies made use of devious reporting practices to hide the fact that inventories were building up as the hi-tech companies over produced in an effort to take market share of the growing demand of electronics, found themselves bankrupt overnight! The incentive to charm investors often leaves board of directors at the mercy of such choices in a bid to maximize earnings before the great fall. I will not be surprised if similar practices have been employed in recent history!!!

MartyWednesday, April 6, 2016 at 8:05 am

Regarding tax inversions, a point I don’t see anyone making is that the reason companies take these actions is to avoid the unreasonable “world-wide” profits tax to which the US government thinks it is entitled. If we would just tax profits made in the US, even at the current high rate, inversions would not be necessary. Why does our government think they are entitled to tax profits made in Germany for example? Of course, you have to enforce transfer pricing rules to avoid manipulation, but other countries do it successfully. Time to stop condemning the companies who are inverting and call out the real culprit, our corporate tax system.

Chuck BurtonWednesday, April 6, 2016 at 1:13 pm

See what I said above. It is not “your money”, either personally, or via an investment in a company. The politicians and bureaucrats regard ALL money as THEIR play-toy. If they don’t think they have their share, they will bully you for it. It is about time to face the bullies down.

William BischoffWednesday, April 6, 2016 at 5:13 pm

I have visited Disney for the last time. Their gift of $2M to Rubios campaign in exchange for an expanded Bill to bring in foreign workers so they could fire Florida residents smells.

ForestMonday, April 11, 2016 at 6:10 pm

Don’t spend more money than you bring home pay off home and all other loans fast
Stay away from wall St. unless you like gambling your odds of winning are better in Vegas
Do everything you can to avoid owing money to anyone even friends or family
Invest in hard assets tools land solar power food and what not